Why clients should consider a retirement annuity

Roenica Tyson, Sanlam Investment Product Manager – Findings from the 2016 Sanlam Benchmark Survey show many retirees’ income – even in the affluent market – isn’t keeping pace with inflation, leading to a reduction in the buying power of post-retirement income.

This points to the necessity for investors to supplement their savings in their employer’s pension and/or provident fund. A retirement annuity (RA) is an ideal vehicle for this purpose.

To encourage more saving for retirement, government introduced new limits for tax-free contributions to retirement funds. Investors can now receive tax benefits by investing up to 27.5% of the higher of their taxable income or remuneration into retirement savings products. There are no longer separate allowances for RAs as this limit applies to all contributions made to pension, provident and RA funds. The tax-deductible amount is capped at R350 000 per year.

Reinvesting the tax saving can significantly increase the final value of the investment. In addition, while saving in an RA, investors don’t pay tax on any interest or dividends, and no capital gains tax applies to the growth in the investment.

Investors have until 28 February to take advantage of the tax benefits in the current tax year, by topping up their RAs.

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